The VAT treatment of property service charges has long been a difficult area.
A recent tax case concerning residential property service charges has added further complexity.
Mandatory service charges paid by residential occupiers to landlords are generally exempt from VAT If they are directly related to the tenant’s right to occupy the property.
By concession, the exemption extends to supplies made to the occupier by someone other than the landlord where they are paid “towards the upkeep of the dwellings or block of flats in which they [the occupier] reside & towards the provision of a warden, caretaker, & people performing a similar function for those occupants”.
However, as the case confirms, the concession does not cover the situation where the above services are supplied to the landlord – even although the cost of those services may subsequently be passed on to the residential occupier.
We suspect that many suppliers within the residential property sector may not be fully aware of the VAT rules as they apply to service charges.
If you are in doubt we recommend that you review this issue as a matter of urgency and take action to correct any past errors.